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Business

New Smartphone Upgrade Plans Can Be Costly In The Long Run

Originally published on Fri July 19, 2013 6:12 pm

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Nearly 60 percent of Americans have smartphones, up from just 8 percent five years ago.

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Three of the four major wireless companies are out with new plans for those who want the latest smartphone sooner. The plans, with names like Verizon Edge and AT&T Next, essentially let you rent a phone for six months or a year and then trade it in for a new one — but there's a catch.

"You're paying essentially twice," says Avi Greengart, who is research director for consumer devices at Current Analysis and does some consulting for the industry.

T-Mobile started this craze with its Jump plan that tacks on a monthly fee for the privilege of upgrading early. But T-Mobile, the underdog, charges less for service. That's not the case with Verizon and AT&T.

"You're also subscribing to a rate plan that historically had a subsidy built in," Greengart says.

A big-name smartphone like the Apple iPhone or Samsung Galaxy costs about $650. Most of us never pay that much upfront. Instead, we plop down $200 for the phone and sign a two-year contract. Baked into our monthly fees is about $20 a month that, over the life of the contract, recoups the full cost of the phone.

But in the new Verizon and AT&T plans, you're paying that $20, and you're paying the full cost of the phone in monthly installments. That's why in many cases, the carrier comes out ahead.

"It certainly looks like AT&T has developed its plan in such a way that it doesn't lose any money," Greengart says.

It's a similar story with Verizon, but when asked, spokesmen for both companies gave similar answers about these new plans increasing customer "choice." The old-style two-year contract plans are not going away. Asked about paying toward both monthly payments based on the full price of the phone and that $20 baked-in fee, neither company would go into details about the companies' pricing.